Heritage in $125m retail bond offer

Queensland-based regional lender
Heritage Bank
has launched a $125 million offering of listed bonds in a rare issue of senior-ranking corporate debt to retail investors.

The senior unsecured bonds have a five-year maturity and will pay a fixed rate of about 7.25 per cent, allowing investors to lock in a set rate for five years when markets are predicting the cash rate to fall sharply.

It is the second ASX-listed debt raising by the lender, following its $50 million subordinated notes issue in September 2009.

The bank’s chief executive,
John Minz,
said the five-year bond would broaden its funding base and extend the maturity of its debt profile.

“Earlier in the last decade, we used securitisation significantly to grow the business and in the mid-part of the decade, we attained dual credit ratings and went into short-term wholesale market, so for us it’s a natural evolution," he said. “We have increased our retail [deposit] funding and for us it’s about further diversification. As a piece of the funding pie, it makes sense and adds duration."

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The 7.25 per cent rate is equivalent to about 355 basis points over the bank bill rate, based on the 3.7 per cent five-year “swap" rate, which factors in the market’s expectations about future interest rate settings.

“We have a presence out there and it’s the start of things to come. We could use this in the future for slices of long-term funding through non-traditional [deposit] retail funding," Mr Minz said.

Mr Minz said that the bank would consider wholesale investor targeted bond raisings but that the 135-year-old lender’s story of low arrears and stable profits resonated better with retail investors.

Several fixed-income brokers said the bond issue was a good opportunity to lock in a high fixed rate for five years amid an environment of declining rates and the bond offered good value compared with its existing lower-ranking subordinated security.

The bond sale is being arranged by Commonwealth Bank of Australia. Evans & Partners and UBS are joint lead managers.

Heritage’s bond issue has once again highlighted the stand-off between the major credit rating agencies and the Australian Securities and Investments Commission, which has barred companies from sharing current credit ratings with retail investors.

That differs from the lower BBB- credit rating assigned to it by Standard & Poor’s, which downgraded the bank in December, and the more favourable Moody’s A3 rating assigned to the bank (equivalent to A-). Heritage and its advisers and brokers marketing the bonds are not allowed to refer to S&P and Moody’s credit ratings and research because these agencies refused to apply for licences to rate financial products distributed to retail investors.

“That’s an issue for rating agencies and ASIC," Mr Minz said. “Our issue is what could be publicly related to any of our transactions because of the issues between ASIC and the other three rating agencies."

The divergent ratings did not concern Mr Minz, who took exception to S&P’s low rating of the bank.

“It concerns us that S&P would take an opinion about Heritage which is totally different to Moody’s and Australia Ratings," he said.

The bond raising is only the sixth senior unsecured “vanilla" bond issue by an Australian company in the past decade, following deals from Primary Health Care, Tabcorp, Commonwealth Bank and Bendigo and Adelaide Bank.

More recently, Australian Unity issued $122 million of senior bonds in 2011. The bonds paid a margin of 355 basis points over the bank bill rate, the same equivalent rate.